SEC Files Two Investment Fraud Actions

by Dorsey & Whitney LLP
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The SEC brought two investment fraud actions. One centered on defendant Thomas J. Lawler, known as the Reverend Tom, and the sale of administrative remedies or ARs which eliminated the purchaser’s debt while yielding significant profits. SEC v. Lawler, 1:14-cv-02468 (N.D. Ga. Filed July 31, 2014). The other focused on sales made by M. Shi Shailendra in a real estate investment vehicle which was based on distressed properties from the financial crisis. SEC v. Shailendra, Civil Action No. 1:14-cv-02465 (N.D. Ga. Filed July 31, 2014).

Lawler centers on The Reverend Tom, his Freedom Foundation and the related program. It evolved from his investigation into the banking system following debt he piled up related to the illness of his son. According to the theory, each investor has an account established at birth in their name. It is sufficient to fund all future borrowing by the person. When a person borrows from a bank they are actually drawing down their funds from the account. The Reverend Tom holds that charging interest for the loan under these circumstances is unfair.

The answer to correcting this injustice is the AR. When acquired, a series of thee notices to a creditor are prepared by the Reverend Tom and his staff to the identified creditor. Investors need only supply the funds. The AR then enters the “payment cycle” and awaits a series of events which will trigger a massive payoff. Debts will be eliminated, according to the theory and every $1,000 invested will yield at least $325,000.

Using a sales force of individuals he calls “Ambassadors,” the Reverend Tom has sold at least 2,000 ARs since 2004. Investors have put up sums ranging from $1,000 to $10,000. The Ambassadors have benefitted from the commissions paid to them. The Reverend Tom has benefitted from the use of the funds. The investors have not been paid a cent. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 23054 (Aug. 1, 2014).

In Shailendra investors were not promised the huge returns of the ARs. Rather, toward the end of 2008 Mr. Shailendra set up Interstate North 5 Acres, known as Shi Investments Six. The purpose was to invest in newly acquired distressed real estate from the financial crisis. Investors were told that the purchases were discounted and would be flipped in three to five years at sizable profits.

During the period the properties would be managed under an operating agreement. Under the terms of the agreement Mr. Shailendra would manage the properties. Each investor would receive profits based on the number of membership interests they purchased.

There were two key points to the deal. One was Mr. Shailendra’s representation that he invested his own funds in Shi Investments Six. The other was the investors. Those solicited were primarily Atlanta-based doctors of Indian or Middle Eastern descent who placed great trust in him because of his heritage, prominence in the Indian-American community, political connections and willingness to risk his own funds.

In fact Mr. Shailendra allocated himself an equity interest but it was not funded. He also misappropriated investor cash and at times used it to fund earlier deals. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a).

Mr. Shailendra settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. He also agreed to pay disgorgement of over $2 million and prejudgment interest but the settlement waives payment of that amount and a penalty based on inability to pay. Mr. Shailendra relinquished any claims he has against the development and agreed to the entry of an order barring him from the securities business and from participating in any penny stock offering. See Lit. Rel. No. 23055 (Aug. 1, 2014).

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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